You just got sued in Virginia Circuit Court, so now what?

Virginia has two trial courts that someone in the construction industry is likely to encounter. The first is General District Court, and you may start seeing this court more often because effective this year the jurisdictional limit was increased to $25,000. I'll discuss those processes in a later blog. But if the amount in controversy is greater than $25,000, the action will likely be in Circuit Court. After service, you have 21 days to file a responsive pleading with the court. That means you want to get the complaint to your attorney sooner, rather than later, so they can consider responsive strategies, including whether they'll be filing an answer, a motion, or some other response. Also, in some instances there could be insurance coverage or at least insurance defense, and so you'll also want to consider advising your insurance agent for their input, and the giving of required notices to your insurer (your policy will specify how, when, to whom, etc.). Your attorney may also want to consider "third-partying" in another party to the lawsuit, such as for example your subcontractor if the suit alleges deficiencies with their work. All of this needs to be considered and decided within those 21 days of service, unless the time is extended by the court. So, a lawsuit is not something you want to sit upon and, like fruit, it doesn't grow better with age. I'll discuss other aspects of that decision making process from time to time in this blog.

Court of Federal Claims Equitable Powers: Yes the CoFC Can!

Disregard that last blog! Despite that CoFC decision, the Federal Circuit, which has appellate jurisdiction over the CoFC, discussed the CoFC's equitable powers in its recent decision in Turner Constr. Co., Inc. v. U.S., 10-CV-195, decided July 14, 2011. In it, the Federal Circuit confirmed the CoFC's decision to enjoin the procurement of a contract to a bidder and to order that another bidder's contract be reinstated (this was an appeal of a GAO decision recommending an agency re-procure without participation of the awardeed contractor). The Federal Circuit noted that the CoFC was awarded broad equitable powers under the Tucker Act by reason of the power to "award any relief" language in that act, and that thus the CoFC "has broad equitable powers to fashion an appropriate remedy." The decision also addresses in detail the standard to be applied by the CoFC in reviewing the CoFC's review of a GAO decision, and the GAO's review of the agency's decision. Interesting read if you need legal analysis regarding either.

Declaratory relief: Not in the CoFC

On July 6, 2011, the U.S. Court of Federal Claims held that while it had jurisdiction to hear a plaintiff's claim against the Department for Veterans Affairs for breach of a property contract to the extent of the plaintiff's money damages claim, it did not have jurisdiction or authority to award declaratory relief or "specific performance."  That case is Patricia Hoag v. United States, Fed. Cl., No. 11-4C, 7/6/11. This is an area with respect to which there have been contrary views, but - subject to reversal - would appear to resolve the question in the negative to contractors seeking declaratory or other non-monetary relief from the court. The court did allow the case to proceed on the money damage portion of the claim though. Pleaders should consider this case when drafting complaints for CoFC relief and expect it to be used by Justice Counsel for pending or future claims.

Alternative Dispute Resolution: Why it's great

Contract disputes are traditionally resolved by judges or juries. Besides the costs involved, this entails putting resolution of your dispute in the hands of a judge or jury who does not know the facts or circumstances anywhere near as well as you, and may not, because of legal rulings, even get the complete facts or circumstances to make their decision. Further, it is unlikely that your judge will be well-versed in the practical aspects of construction projects or standards, and more likely than not that anyone that could serve on a jury with such knowledge will get "struck" from the jury by one side or the other and so not be able to serve on the jury.

Alternative dispute resolution, and in particular mediation, provides a mechanism to avoid this, and have your dispute considered and resolved with construction subject matter experts, either as neutral facilitators or arbiters. Such methods can range from very detailed processes with extensive pre-resolution "discovery" to much more informal discussion sessions.  They can be just between project personnel to try and resolve change orders, or involve counsel for more complex or value related disputes. The beauty of ADR is that the parties get to shape its form and process.  They can mirror trials but with subject matter experts, or be conducted more summarily with rules of evidence or procedure tabled.

In the end, though, your dispute is resolved or facilitated by means of your own choosing, and generally more quickly and in a less costly fashion. So why isn't it used more often? That's a complicated question but the answer generally lies in either one side or the other's perception of leverage, or their counsel's unfamiliarity with such process, and preference for the "old ways" of resolution. To me, the more important question about ADR is not whether to do it (you should) but is rather when you should do it. This hinges primarily upon whether there is sufficient information already known or exchanged to make an ADR session effective. Typically, the sooner that is the better, because resolution is more likely since positions haven't yet been entrenched, and quicker resolution is usually less costly.

Business Decision Voided Insurance Coverage

Claims are made against you regarding concerns with your work, so you decide to "fix" the problem as a business decision to maintain good will and avoid further issues. Sounds like a good business decision, doesn't it? Well, not if you think the underlying issue could be subject to insurance coverage. In a recent decision of first impression construing Virginia insurance coverage law, Judge Smith of the U.S. District Court for the Eastern District of Virginia concluded recently in Builders Mutual Insur. Co. v. Dragas Management Corp., Civil Action No. 2:09cv185 that the mere threat of litigation is itself insufficient to support a "legal obligation" so as to trigger a carrier's obligation to pay money damages.

The context of that decision was the property developer's decision to replace "Chinese drywall" after receiving numerous complaints by homeowners. Judge Smith sided with what she concluded was the majority of courts who have concluded that in order for an insured to be "legally obligated" there must have been either a final judgment or a settlement as the result of a suit. She then concluded that the demands made upon the developer were legally insufficient to trigger such legal obligation because doing so would improperly expand the carrier's obligation beyond the contractual coverage. She therefore held that the developer "volunteered" the remediation and could not recover for it from its carrier, concluding that "Demands under the guise or potential of a legal right are not sufficient to create a legal obligation to pay by the insured, and the sums expended in response to such demands do not constitute 'damages' under the insurance policies at issue."

So what is a developer or contractor to do? This case at least concludes that if you decide to "do the right thing" or try and "get ahead of the curve" regarding mere threats of litigation, you clearly do so at your own risk with respect to coverage for what you spend doing that. This case dictates consultation with your carrier before you make that type of decision, or you likely will have been concluded to have waived coverage; at least if you case ends up before Judge Smith, until such time as the Virginia Supreme Court or a higher Federal Court addresses the issue differently. The downside of this decision is that it discourages pre-suit settlement, and the result may well be increased litigation. But if you think you may have coverage at that point, voluntary remediation should only be used when you in fact are willing to pay for the remediation at your own cost.

To the cynical, this case reflects the adage that "no good deed goes unpunished." To me, its further shows the importance of involving everyone available from your business teams before making this type of major business decision, including your insurance agent and your attorney, when it comes to questions of building defects, potential coverage and the pros and cons of your various available courses of action.